Trades put Singapore market on the spot

Singapore generally dislikes drawing attention to itself when it comes to financial markets.

Having discreetly built itself up as an Asian financial hub, Singapore is now one of the world’s largest centres for wealth management and commodities trading. But recently the Lion City drew some unwelcome attention in foreign exchange markets, where it is ranked fourth-largest in the world by trading volume.

Last month two former UBS traders sued the Switzerland-based bank, alleging they were wrongfully dismissed and accused by the bank of gross misconduct. In two lawsuits filed in Singapore, they claim they were fired to cover up any role the bank had in allegedly manipulating the pricing of foreign exchange derivatives.

One trader, Prashant Mirpuri, was an “emerging market South-East Asia non-deliverable forward trader", according to court filings. The other, Mukesh Kumar Chhaganlal, was a former co-head of macro-trading in emerging markets Asia.

Behind these opaque job titles lies an equally opaque business done in Singapore: dealing in a type of foreign exchange contract known as a non-deliverable forward.

NDFs trace their roots in Asia to the region’s financial crisis of the mid-1990s, after which many countries introduced currency controls.

NDFs are an obscure corner of the over-the-counter derivatives market where two parties agree to buy or sell a foreign currency – in the Singapore case, this meant the currencies of South-East Asian countries Malaysia, Indonesia, the Philippines and Vietnam – for a fixed price at a future date. Such contracts are used by companies to protect themselves against fluctuations in non-convertible currencies.

Banks in Singapore run trading desks where they are also traded speculatively, usually over the phone. Mr Mirpuri was in charge of one such desk at UBS.

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Because it is not possible under an NDF to take delivery of the local currency when it comes to settling the contract on expiry, both counter-parties take their cue from a “fixing rate" set daily by a panel of banks in Singapore, in Indonesian rupiah, Malaysian ringgit, Vietnamese dong and so forth. That is used to calculate a dollar profit or loss at contract expiry.

Quite how this “shadow" fixing system has emerged in Singapore, alongside the official rates set by South-East Asian central banks, is a bit of a mystery. Bankers say it was because traders did not historically trust the onshore fixing. It is easy to forget the depth of anti-market feeling in Malaysia during the Asian crisis.

But the fact is Singapore is the biggest NDF market in Asia outside Japan. This has become awkward for Singapore, due to the UBS lawsuits and the scandal over manipulation of the London interbank offered rate, or Libor.

As part of its own probes into Libor and Sibor, a local equivalent, the Monetary Authority of Singapore in September directed banks to review their processes for setting rates for NDFs. Banks should “report immediately any irregularities" and take “appropriate disciplinary action against staff involved".

UBS declined to comment on the traders’ lawsuits. It said it was “co-operating fully with the authorities" on the Singapore regulator’s review.

In his lawsuit, Mr Chhaganlal claims that after the Libor scandal emerged he raised concerns “over the way in which reference rates were being set in the Singapore market". He observed “increasingly unrealistic" US dollar-rupiah rates.

At least one central bank in South- East Asia seems uneasy. Bank Negara, Malaysia’s central bank, this month reminded domestic banks to use a locally set reference rate for dollar-ringgit transactions, implicitly steering them away from the rate set in Singapore.

None of this looks good. It was the opaqueness of largely unregulated OTC markets, such as credit default swaps, that fuelled the 2008 global financial crisis.

The Singapore regulator is expected to wrap up its review of the NDF market soon. It is also working on new rules for OTC derivatives as part of Singapore’s compliance with a global drive to tighten up on this area.

The US Dodd-Frank Act pushes for NDFs to move away from the clubby, phone-brokered market and on to more transparent electronic trading platforms. Singapore and other Asian regulators are less keen.

They do not want to choke off nascent markets, for understandable competitive reasons.

But leaving the NDF market unregulated should not be an option if Singapore wants to avoid attracting any more unwanted attention.